• European indices [Euro Stoxx 50 -2.0%] have succumbed to the risk off tone as US President Trump has threatened to hike tariffs on China, with Asia afflicted overnight from this, US equity futures are likewise subdued.
• Subsequently, China’s Foreign Ministry states that they hope the US can meet China halfway and are preparing to go to the US; although, they refrained to comment in Vice Premier Liu He will attend.
• In FX, safe havens propser while the remaining G10 currencies broadly underperform the USD
• Looking ahead, highlights include ECB’s Praet, Fed’s Harker and BoC’s Poloz. UK markets closed

ASIA-PAC

Asia-Pac indices and US equity futures began the week with heavy losses as US-China trade tensions flared up after President Trump tweeted that the US will raise the 10% tariffs on USD 200bln of Chinese goods to 25% and suggested they will soon extend 25% tariffs to an additional USD 325bln of Chinese goods which are currently untaxed. Furthermore, China’s potential cancellation of this week’s trade discussions in Washington added to the pressure for equity futures and in turn wiped out all of Friday’s gains from the Goldilocks jobs report. ASX 200 (-0.8%) was negative with the index led lower by underperformance in tech and with the top-weighted financials sector also pressured amid losses in ‘Big 4’ bank Westpac after it reported a 24% drop in H1 statutory profit. Elsewhere, all components in the Hang Seng (-3.5%) were negative and the Shanghai Comp. (-5.2%) slumped heavily due to the renewed tariff threats which reportedly could shed 1.5% off China’s GDP growth, while a PBoC liquidity injection and targeted RRR cut for small and medium-sized banks, as well as mixed Caixin Services and Composite PMI data did little to brighten the sentiment in China. As a reminder, Japan and South Korea remained shut for Children’s Day.

US President Trump stated over the weekend that the US will raise the 10% tariffs on USD 200bln of Chinese goods to 25% beginning on Friday and suggested that USD 325bln of additional goods from China which remain untaxed, will be shortly at a rate of 25%, while he suggested the trade agreement with China is proceeding too slowly and firmly rejects efforts to renegotiate. Furthermore, there were also reports that President Trump was told by aides that significant hurdles remain to reaching a trade agreement with China and a source familiar with President Trump’s thoughts on tariffs said that China have been backing away from agreements the US negotiating team believed they had already made. (Newswires/Twitter/Axios) This follows comments from President Trump on Friday that the US is doing fine with China regarding talks and that progress towards a deal are going "pretty well", while he added that a deal may happen in a couple of weeks although US will be fine if it doesn't happen. (Newswires)

China is said to be mulling cancelling trade discussions this week following US President Trump's tariff threats. It was also reported that some working level Chinese officials have postponed their flights to the US and may fly as late as May 8th which is the date of the negotiations and that Chinese Vice Premier Liu He is very unlikely to go to the US this week, However, reports later suggested that Vice Premier Liu could delay his trip by 3 days and shorten it to only 1 day for trade talks. (WSJ/Global Times/Twitter/SCMP)

Subsequently, Chinese Foreign Ministry state that they hope the US can meet China halfway on trade talks the delegation is making preparations to go the US, and Ministry refrained to answer if Vice Premier He will partake in the delegation. Addeed that their Navy has instructed US ships to leave the South China Sea and refrain from such provocative acts. (Newswires)

PBoC is to set lower reserve requirements for small and medium sized banks effective May 15th which will release CNY 280bln of long-term funds. (Newswires)

PBoC injected a net CNY 20bln via 7-day reverse repos. (Newswires) PBoC set CNY mid-point at 6.7344 (Prev. 6.7286)

Chinese Caixin Services PMI (Apr) 54.5 vs. Exp. 54.2 (Prev. 54.4). (Newswires) Chinese Caixin Composite PMI (Apr) 52.7     (Prev. 52.9)

US

Fed’s Daly (Non-Voter, Dove) said inflation has consistently fallen below the Fed target and stated the economy is in a good state so now is the time to examine the Fed framework, while she added that an average inflation target would be a more attractive option. (Newswires)

UK/EU

UK PM May is said to be optimistic she is nearing a deal with the opposition Labour party on Brexit, while Foreign Minister Hunt commented that there is a glimmer of hope the government can reach a Brexit compromise with Labour. It was reported that PM May’s officials were drafting a new law ahead of a potential Brexit deal with the Labour party in an attempt to break the ongoing stalemate; the move would help ensure a customs unions arrangement and guarantee that there are no checks on goods flowing between the UK-EU border. However, there were later reports that suggested PM May was warned that more than 100 MPs would attempt to block a soft Brexit. (Newswires/BuzzFeed)

UK PM May reportedly held secret discussions concerning a 3-way referendum in which she carried out scenario planning with aides and ministers in the event they cannot prevent a parliamentary vote on a 2nd referendum. (Telegraph)

UK Shadow Chancellor McDonnell poured cold water on PM May’s plan for a temporary customs union in exchange for Labour support and likened the cross-party discussions as similar to entering a contract with a company going into administration. In related news, Shadow Health Secretary Ashworth also dismissed talk of an early compromise and suggested that PM May’s proposals would risk US health giants getting their hands on the NHS, while it was also reported that Labour MPs will not back the Brexit deal without a 2nd referendum. (The Guardian/Independent)

UK Chancellor Hammond is mulling a significant hike to the minimum wage to GBP 9.61 per hour from current GBP 8.21 per hour. (The Guardian)

Italian Deputy PM Di Maio states that he does not see any risk of the government collapsing due to the Graft case which involves a League undersecretary, adds that the government is not at risk unless the League Party opens a government crisis during the next cabinet meeting. (Newswires)

EU Markit Comp Final PMI (Apr) 51.5 vs. Exp. 51.3 (Prev. 51.3)

- EU Markit Services Final PMI (Apr) 52.8 vs. Exp. 52.5 (Prev. 52.5)

- German Markit Services PMI (Apr) 55.7 vs. Exp. 55.6 (Prev. 55.6)

- German Markit Comp Final PMI (Apr) 52.2 vs. Exp. 52.1 (Prev. 52.1)

GEOPOLITICAL

US President Trump tweeted that North Korea leader Kim knows that “I am with him & does not want to break his promise to me”, while he added a deal will happen. In related news, there were reports over the weekend that North Korea test fired several short-range missiles which travelled 70km-200km eastwards. (Newswires/Twitter)

US National Security Adviser Bolton said US is deploying a carrier strike group and bomber task force to US Central Command region to send a clear message to Iran that any attack on US interests or allies will be met with unrelenting force. (Newswires)

US renewed sanction waivers allowing UK, Russia, China and France to continue non-proliferation work with Iran, although it could place sanctions if Iran exchanges enriched uranium for natural uranium and will permit a continuation of projects that restrict Iran's ability to restart its defunct nuclear weapons program. (Newswires)

Eastern Libya forces led by Khalifa Haftar conducted airstrikes on targets in Tripoli and said they have destroyed the Government of National Accord's operation headquarters. (Newswires)

EQUITIES

Major European Indices [Euro Stoxx 50 -2.0%] have begun the week with heavy losses in-line with their Asian counterparts and US equity futures as markets move back into risk-off mode following US President Trump tweeting that the US will raise tariffs on USD 200bln of Chinese goods from 10% to 25% and indicated that they will consider extending the scope of tariffs to include an additional USD 325bln of goods which are currently not taxed. However, subsequent comments from China’s Foreign Ministry, that they hope the US can meet China halfway on trade talks and that the delegation are preparing to go to the US, did generate a glimmer of positivity across markets. Although, it is still unclear if Vice Premier Liu He will feature in this delegation. Losses across European indices are broad based with no standout under/out performer, and a similar scene is present across sectors. Although, luxury names such as Christian Dior (-3.7%) and Kering (-3.0%) are heavily weighed on by the increased US-China trade tensions. Similarly, auto names are lower due to their supply chains being particularly vulnerable to trade tensions, Volkswagen (-3.5%) have been hit the hardest, with the Co’s CEO previously stating that import tariffs from the US on the EU could cost the Co. billions of euros each year. Other notable movers this morning include ThyssenKrupp (-4.2%) amidst reports that EU anti-trust regulators are likely to block the Co’s proposed merger with Tata Steel due to concerns over potential price increases and the impact on competition; the proposed merger would create Europe’s second largest steel producer and follows comments from Tata Steel’s European Works Council that they do not believe the merger is in the best interest of the Co’s workers. At the other end of the Stoxx 600, and today’s only notable mover in positive territory are Telenor (+4.0%) following reports that the Co. and Axiata have initiated discussions to merge their Asian operations with the Co. likely to own 56.5% of the merger.

Boeing (BA) has stated that it knew of a problem with its 737 Max jets around a year prior to the aircraft being involved in an accident,  but that they did not take any action on this  Stating that they inadvertently made an alarm feature optional, instead of making it a standard feature; though continue to insist that that should not impact flight safety. Elsewhere, 737 plane skidded off a runway and into a river, after landing heavily in a thunderstorm in Florida. (Newswires)

FX

JPY/CHF - While the Usd holds above Friday’s post-NFP lows and the DXY pivots around 97.500, safe-haven positioning in wake of latest US-Chinese trade developments and a diplomatic spat between the 2 nations over naval vessels in the South China Sea has heightened demand for the Yen and Franc. Following Trump tweets threatening to imposes higher tariffs on Usd200 bn worth of Chinese goods this Friday with a further Usd325 bn possibly subject to increased levies, Usd/Jpy reversed through 111.00 and all the way down to circa 110.30, while stops are said to have been tripped in Eur/Chf on a break of 1.1370 pushing the cross towards 1.1350 and the 200 DMA (1.1345). However, some respite has tempered aversion as China’s Foreign Affairs Ministry says a delegation is still preparing to head to Washington this week and subsequently seen rebounds to around 110.70 and 1.1375 respectively.

GBP/AUD/CAD/NZD/NOK/SEK - The main G10 underperformers and casualties of the broad risk off start to the new week, as Cable probes support ahead of 1.3100 amidst ongoing Brexit uncertainty and the UK public holiday, while the Aussie, Loonie and Kiwi are all trying to stabilise following declines to 0.6963, 1.3493 and 0.6601. Aud/Usd and Nzd/Usd are also maintaining a defensive stance in the run up to RBA and RBNZ policy meetings that are both expected to be ‘live’ in terms of easing prospects, while the deterioration in US-China relations has also undermined oil to the detriment of the Cad and Nok (latter down near 9.8000 vs the Eur). Back down under, hefty option expiry interest may provide support and resistance in Aud/Usd given 1.1 bn at the 0.6950 strike and 1 bn at 0.7000-15. Elsewhere, Eur/Sek is elevated around 10.7200 on the back of another soft Swedish PMI as the services headline dips, albeit still comfortably above the 50.0 threshold unlike manufacturing.

EUR - Conversely, an upward revision to the final pan Eurozone services PMI despite mixed national surveys, slightly firmer than expected retail sales data and an encouraging Sentix Index have all helped the single currency contain losses within a 1.1200-1.1160 range vs the Dollar. Note also, decent option expiry interest could be keeping the headline pair rangebound as 1.6 bn runs off between 1.1150-60 vs 1.1 bn from 1.1185-1.1200.

EM - Widespread losses vs the Greenback amidst the aforementioned generally sour sentiment, as Usd/Cnh rallies through 6.8000 at one stage vs the PBoC’s official 6.3744 Usd/Cny fix, while Usd/Zar tests offers ahead of 14.5000 in advance of Wednesday’s SA elections and Usd/Try peers over 6.0000 on the ongoing and well documented Turkish, plus CBRT concerns about (higher) PPI cost pressures exerting and increasingly stronger influence on CPI.

FIXED INCOME

The risk premium in Bunds and US Treasuries continues to fade even though stocks and Italian bonds remain under pressure on the flare up in US-China trade wars and political wrangling in Rome. The 10 year German debt future is sitting just above a 165.37 low and almost ½ point off best levels, while US equivalents have retreated from their overnight session, albeit still holding a firmer bid awaiting the return of Wall Street with futures pointing to very heavy losses. Back to Italy, BTPS look vulnerable through early May lows, but have retained 130.00+ status by a whisker in wake of a sub-50 composite PMI.

COMMODITIES

Brent (-1.0%) and WTI (-1.3%) have also succumbed to the general risk tone, although are currently trading within a relatively thin band with prices having recovered from overnight lows which were just a shade below USD 69/bbl and just above the USD 60/bbl levels respectively. Aside from the all-encompassing US-China story news flow for the complex has been somewhat thin, notably Saudi Aramco raised their OSP for all crude grades to all regions (ex-US) for June, with Arab Light’s price falling by USD 0.10/bbl for the US.

Gold (+0.3%), along with other safe havens, has benefitted from the increased US-China tension and the resulting risk off sentiment, with the yellow metal now trading towards the middle of a USD 7/oz range which did see it reach USD 1287/oz. Copper, has suffered as the metals largest buyer China returned to market, after a 3-day Labour Day holiday last week, with China playing catchup and sentiment being impacted by updates regarding the potential increase or imposition of tariffs on China. Iron ore port holdings in China fell 1.8% to 133.6mln tons which is the lowest since October 2017. (Newswires)